Your savings rate may be a number you've never thought about. I am consistently surprised, not by the number of people who don't know their savings rate, but by the people who AREN'T SAVING AT ALL!
There is a reason your savings rate is so important. It's indicative of the future, and how much money you will have. If you know what you'll need to survive on in the future, you can calculate just how much your savings rate needs to be! Saving money is not fun for most. I know spending it is significantly more fun...until a random bill hits. So let's learn how to calculate a savings rate with a simple example.
The mathematical formula for a savings rate is: Monthly saving amount/monthly gross income x 100.
Let's use Nathan for our example. Nathan makes a take home amount of $4,226. This needs to be take home and not pre-tax to correctly calculate the savings rate! Of this $4,226 he puts $100 into a high yield savings account, and $400 into a retirement account. This means he is saving $500 every month.
500/4225 = 0.1183 x 100 = 11.83% savings rate.
While this number is good, we would like it to be closer to %20 of your take home pay. One important thing to note is that any money you are putting towards paying off debt also counts towards your savings!
Now if we know that Nathan is also putting $600 a month onto his student loans, that changes our math!
1100/4225 = 0.2603 x 100 = 26.03%
In reality Nathan is putting more than he needs into savings! This is a bonus though, and will serve him in the end.
I hope this simplified what and why a savings rate is necessary, and how to calculate it! Remember that as time changes, income changes, and that these rates will need to be adjusted. If you'd like to know more about savings and your potential savings rate leave a comment below!
-Spencer
